Palomar Holdings Inc

NASDAQ:PLMR

Earnings Call Transcript 2019-Q4

[Operator]

Good morning, and welcome to the Palomar Holdings Incorporated Fourth Quarter and Full-Year 2019 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation the conference lines will be opened for questions with instructions to follow at that time. As a reminder, this conference call is being recorded.

I would now like turn the conference over to Mr. Chris Uchida, Chief Financial Officer. Please go ahead, sir.

[Christopher Uchida, Chief Financial Officer]

Thank you, operator, and good morning everyone. We appreciate your participation in our fourth-quarter and full-year 2019 earnings call. With me here today is Mac Armstrong, our Chief Executive Officer and Founder. As a reminder, a telephonic replay of this call will be available on the Investor Relations section of our website through 11:59 P.M. Eastern Time on February 26, 2020.

Before we begin, let me remind everyone that this call may contain certain statements that constitute Forward-Looking Statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about management's future expectations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in our most recent periodic report and our perspectives filed with the Securities and Exchange Commission January 10, 2020. We do not undertake any duty to update such forward-looking statements.

Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe are useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S GAAP. A reconciliation of these non-GAAP measures to the most comparable GAAP measures can be found in our earnings release.

At this point, I will turn the call over to Mac.

[Mac Armstrong, Chief Executive Officer]

Thanks, Chris, and good morning everyone. Over the course of 2019, Palomar executed on its mission to build a diversified book of specialty property business. We remain focused on developing a suite of distinctive and flexible products delivered via an easy to use and scalable platform that incorporates an analytics driven underwriting and risk transfer framework.

Our results over this past quarter in the full-year of 2019 demonstrate that we are making progress in our mission and that our products are well received by the market. But before we go into the quantitative highlights for the quarter and year, I want to drop eyes on qualitative perspective on 2019 as it was a momentous year.

The likely accomplishments include expanding our geographic footprint into 27 states. Also making multiple new carrier partnerships including the largest in our history, launching two new divisions of the Company in the Marine and assumed reinsurance, making significant investments in our human capital with the notable hiring of Chief Risk Officer and an FTP people and talent. Securing $345 million of incremental reinsurance limits to prudently support our growth. And lastly, our initial public offering in April was catalyzed several growth drivers of the business.

Turning to our results. Gross written premium grew 68% year-over-year for the fourth quarter and 63% year-over-year for the full-year of 2019. Importantly, we generated strong growth across our expanding product portfolio, not just from a few standouts.

72% year-over-year growth of our Earthquake products during the fourth quarter demonstrates that our Earthquake franchise continues to gain traction and that we increasingly play a leadership role in the market segment.

Our non-Earthquake products grew 59% year-over-year in the fourth quarter further driven that our product development strategy is exportable to other segments of the specialty property market.

As a Company, we remain focused on developing differentiated products to serve acute market needs and I'm pleased to report that the contribution from our newest product lines continue to grow.

Specifically, our residential flood program grew to 140% year-over-year in the fourth quarter, while our recently launched Inland Marine Department continued to expand its geographic footprint, product offerings and distribution network.

Overall premiums for our non-Earthquake products represented 30% of total gross written premium during the quarter. In many cases, these products are in markets that are multiple times larger than the addressable Earthquake market and offer significant runway for future growth and broadening of our premium base.

Additionally, we generated solid growth across both commercial and personal lines, exhibiting 2019 was a mix of 29% commercial is 71% personalized, an attractive rate environment and expanding distribution network led to135% growth year-over-year in the fourth quarter for commercial lines offerings.

Our commercial lines experience at average form positive renewal rate increase of 11.2% during the fourth quarter compared to 9% in the third quarter. Accelerated rate increases was most pronounced in our commercial Earthquake line of business, which saw a composite renewal rate increase of 13.8% versus 9.2% in Q3.

Personalized offerings exhibit a continued momentum and grew 46% year-over-year in the fourth quarter. We believe that there is no stronger endorsement of the unique value that we offer to our distribution partners and ultimately the end insurers there are strong premium retention rates.

Average monthly premium retention across all lines of business was 89% during the quarter, up sequentially from 87% in third quarter and compared to 83% during the fourth quarter of 2018. Notably, we saw retention rates above 92% for all risks Hawaiian Hurricane in Residential Earthquake business during the fourth quarter.

The composition of our book of business minimizes our exposure to attritional loss and provides considerable or any visibility. However, we will experience some measure of loss on a quarterly basis even when there isn't a major earthquake or hurricane in Hawaii. Fortunately, our commitment to managing loss exposure to do market selection, underwriting and risk transfer defines attritional loss.

During the fourth quarter, we have loss and loss adjustment expense of $2.2 million and Chris will provide more detail on the losses shortly. But I will point out that even with a modest amount of loss, our loss ratio was 5.6% for the full-year of 2019 compared to a loss ratio of 9% for the full-year of 2018.

Due to this commitment to predictable and profitable underwriting, we were able to achieve a full-year adjusted combined ratio of 63.3% and an adjusted ROE of 24.1%. We believe these results reflect the uniqueness and capital efficiency of our model as we were able to achieve that ROE with the conservative net written premiums and ending stockholder's equity ratio of 0.66.

Risk management is a central pillar of our model and the completion of our January 1 reinsurance renewal reflects our dedication to balancing the growth of our portfolio with conservative reinsurance protection.

As previously disclosed, we renewed approximately 300 million of our core reinsurance program at rates flat to modestly upon exposure adjusted basis and purchased 145 million of incremental limit to support the continued growth of our existing and new products.

As of January 1st, our reinsurance program provides coverage up to $1.2 billion for California earthquake events. This coverage allows the Company to maintain a cushion above the one and 250 year peak zone probable maximum loss and significantly exceed simulated losses from any recorded historical event. Our per event retention remains five million through May 31, 2020.

Looking ahead, we entered 2020 committed to our ongoing growth initiatives. As previously mentioned, reaching an A.M. Best Financial Size Category eight last year, unlock new distribution sources for our commercial lines products and new carrier partners just for our personal lines products.

With the primary proceeds from our January, 2020 follow on offering, we are now in proximity to achieve 250 million in surplus and A.M. Best Financial Size Category nine, which is further unlock new growth opportunities.

Our product suite remains relevant and attractive to the market. We are adding new States of operation and broadening our product offerings in existing ones. We continue to invest in technology that offers distribution partners more streamlined access to our products and improves our ability to drive scale in our business. We are invigorated by the prospects of 2020 and believe that we can grow adjusted net income between 33% and 40% for the full-year.

With that, I would now like to turn the call over to Chris for more detailed review of our financial results.

[Christopher Uchida, Chief Financial Officer]

Thank you Mac. Please note that during my portion when referring to any per share figure, I’m referring to you per diluted common share as calculated using the treasury stock method.

For the fourth quarter of 2019 our net income was $10.9 million or $0.45 per share compared to net income of $4.1 million or $0.24 per share for the same quarter in 2018. For the full-year of 2019 our net income was $10.6 million or $0.49 per share compared to net income of $18.2 million or $1.07 per share in 2018.

For fourth quarter of 2019, our adjusted net income was $11.5 million or $0.48 per share compared to adjusted net income of $4.6 million or $0.27 per share for the same quarter of 2018. Fourth quarter 2019 adjusted net income excluding expenses related to the Company's stock offerings, stock based compensation, and the tax impact of those expenses.

In the fourth quarter of 2018 adjustments exclude the expenses associated with the Company's IPO and tax restructuring. For the full-year of 2019, our adjusted net income was $37.9 million or $1.73 per share, compared to adjusted net income of $90.8 million or $1.17 per share in 2018.

Gross written premiums for the fourth quarter were $73.3 million, representing an increase of 68.4%, compared to the prior year's fourth quarter. For 2019, grocery written premiums were $252 million, growth of 62.7%, compared to $154.9 million in 2018. As Mac indicated, this growth was driven by a combination of robust new business, rate increases and strong premium retention with contributions across our product portfolio.

Ceded written premiums for the fourth quarter were $29.5 million, representing an increase of 35.8%, compared to the prior year's fourth quarter. Our risk transfer strategy remains a critical component of our business, especially as we demonstrate sustained top-line growth.

The increase was primarily driven by an increase in our excess of loss or XOL re-insurance expenses commensurate with our growth and our quota share reinsurance. We utilize quota share reinsurance to minimize the impact of attritional losses on our portfolio and to generate valuable fee income from the ceding attractive risk to reinsurance partners.

The increase in ceded-written premium was in part due to increased ceding to the quota share reinsurance partners. That said, while the total dollar amount of ceded-written premium increased.

Ceded-written premiums as a percentage of gross-written premium decreased to 40.3% for the three months ended December 31, 2019 from 49.9% for the three months ended December 31, 2018, due primarily to the increase in gross in premiums in our residential earthquake and commercial earthquake lines, which are not subject to quota share reinsurance agreements.

This dynamic was also evident for the full-year of 2019 as ceded-written premiums as a percentage of gross written premium decreased to 43% for the full-year of 2019 from 53.6% for the full-year of 2018. As we grow our business, we expect to incur additional excess of loss in reinsurance expense as we maintain a conservative level of overall coverage.

Due to the timing of reinsurance places and the terms of our underlying contracts, there may be a lag between earned premium and a reinsurance placement or expense, but overtime we expect the impact to smooth out and the trend look the same. Our retention remains $5 million per earthquake or wind event and we purchased $1.2 billion a total reinsurance coverage for California earthquake events.

Net earned premiums for the fourth quarter were $31 million, an increase of 75.9%, compared to the prior year's fourth quarter due to the growth in earning of higher gross written premium offset by the growth in earning of higher ceded-written premiums. Net earned premium premiums for 2019 were $100.2 million, an increase of 43.4%, compared to 2018.

For the fourth quarter of 2019, ceded written as a percentage of gross written premiums were 47.5%, compared to 53.4% in the fourth quarter of 2018. For 2019, ceded written premiums as a percentage of gross written premiums were 50%, compared to 49.3% in 2018.

Commission and other income was approximately $0.7 million for the three months ended December 31, 2019 and $0.5 million for the same period in 2018. Commission and other income in 2019 was $2.7 million and $2.4 million in 2018.

Losses and loss adjustment expense or LAE incurred in the fourth quarter were $2.2 million, an increase of $3 million compared to the prior year's fourth quarter. Our losses during the quarter included roughly $0.9 million on attritional losses, equating to a attritional loss ratio of 2.5% for the quarter.

In addition, we booked approximately $1.3 million of losses and LAE from Typhoon Hagibis and unfavorable development from the events that occurred late in the third quarter, including Typhoon Faxai, Tropical Storm Imelda, Hurricane Dorian.

Losses in LAE for the fourth quarter of 2018 included current year and prior year unfavorable development of $0.3 million and $0.5 million respectively. Combined the impact of attritional losses with major events, our loss ratio for the quarter was 7.1% compared to a negative 4.4% for the prior year's fourth quarter.

As Matt mentioned earlier, our 2019 loss ratio was 5.6% compare to 9% in 2018. Our expense ratio for the fourth quarter of 2019 was 56% compared to 64.3% in the fourth quarter of 2018. We believe our business will continue to scale over the long-term.

Our combined ratio for the fourth quarter was 63.1% and in comparison to the combined ratio of 59.9% for the prior year's fourth quarter. Our adjusted combined ratio, which we believe is a better assessment of our efforts, was 60.7% during the fourth quarter compared to 57.3% in the prior year's fourth quarter that included a negative 4.4% loss ratio.

Our 2019 adjusted combine ratio was 63.3% compared to 69.5% in 2018, demonstrating our ability to scale. Net investment income for the fourth quarter was $1.8 million an increases of 75.6% compared to the prior year's fourth quarter. The increase was largely due to increased interest in income generally to my proceeds from our IPO in April.

We maintain a conservative investment strategy as our funds are generally invested in high quality securities, including government agent securities, asset and a mortgage backed securities and municipal and corporate bonds with an average credit quality of AA. The weighted average duration of our fixed maturity investment portfolio, including cash equivalent was 3.49 years at quarter end.

Cash and investment assets totaled of $272.8 million at quarter end as compared to $157.3 million at December 31, 2018. For the fourth quarter, we recognized realized and unrealized gains on investments in the consolidated statement of income of $1.2 million compared to $3.6 million loss in the prior year's fourth quarter. The loss during last year's fourth quarter was principally to a decline in the value of the Company's equity securities.

Our effective tax rate during the fourth quarter was 24.5% compared to the 0.1% for the prior year's fourth quarter. The 2019 fourth quarter tax rate includes an adjustment from prior periods of $0.4 million or approximately three points of the effective tax rate for the quarter. The increase in our effective tax rate is due to our restructuring in early part of this year.

All of our operations are now taxable in the U.S. whereas in the prior periods, our Bermuda operations were not subject to U.S taxes. Excluding any unforeseen events, we anticipate that our tax rate will center around the 21% mark for the 2020 year.

Our stockholder's equity was $218.6 million at December 31, 2019 compared to $96.3 million at December 31, 2018 this increase was due to our earnings during the year, as well as the addition of IPO net proceeds, which will put downward pressure on a return-on-equity in the short-term, while providing capacity for continued growth over the long-term.

For the fourth quarter of 2019, annualized return-on-equity was 20.4% compared to 17.6% during the fourth quarter of 2018. Similarly, our annualized adjusted return-on-equity during the fourth quarter was 21.5% compared to 19.6% during the fourth quarter of 2018. Our adjusted return-on-equity for 2019 was 24.1% compared to 22.7% for 2018 with a lower capital days.

Looking ahead to 2020, we expect to generate adjusted net income between $50.5 million to $53 million, which equates to a growth rate of 33% to 40% on a year-over-year basis. As of December 31, 2019, we had 24,92,325 million diluted shares outstanding as calculated using the treasury stock method.

In taking to account, the 750,000 primary shares issued from the January 2020 secondary offering, there would be 24,842,325 million diluted share outstanding as of December 31, 2019. We do not anticipate any material increase to this number during the year ahead.

With that, I would like to ask the operator to open up the line for any questions. Operator.

[Operator]

[Operator Instruction] Our first question is from Mark Hughes, SunTrust. Please proceed with your question.

[Mark Hughes, SunTrust Robinson Humphrey]

Yes, thank you very much, good afternoon or good morning. On the earned premium, if I look at your trend in written premium in recent quarters, I might have expected a little more earned flow through in the fourth quarter. Was more of that business signed near the end of the quarter? Or is there a something in the seated premium that influences that just anything about the timing of earned premium would be helpful.

[Christopher Uchida, Chief Financial Officer]

Hey Mark, it is Chris. Yes, I would say that there definitely was strong earned premium to - excuse me, strong written premium to finish off the year. So a lot of that is going to help the prospects of 2020.

Along with that, I think we have said in the past that, the call up of 50% ratio for ceded earned premium to ceded gross written premium is probably a better ratio than using the gross written premium to ceded written premium ratio. That can give us a little bit out of lag depending on what happened during the quarter, whether it be a large assumed deal or even significant growth.

So some of that growth that you saw in Q3 and even in Q4 doesn't necessarily play out properly in the ratios, we think looking at the gross earned to ceded earned is a better ratio to kind of pick when you are looking at modeling this out.

So I think those two factors and just you know as we talked about the addition of some excess of loss during the year that needed to come on to the help facilitate the growth, probably started to play out a little bit in the fourth quarter. But overall, we are happy with the prospects and we are happy with the gross written premium and how it is going to play out into 2020.

[Mark Hughes, SunTrust Robinson Humphrey]

And then on the Earthquake business, clearly the California earthquake seemed like it was a catalyst. How have you seen trends as the year has - last year progressed and as you said at the start of 2020?

[Mac Armstrong, Chief Executive Officer]

Hey Mark. This is Mac. Let me answer that question. I will bifurcate it into two components of our Earthquake business. First, our residential and then secondly, our commercial. The Ridgecrest earthquake was a nice driver of new business growth in particularly in the third quarter.

In the fourth quarter, we continue to see strong new business and that manifested itself in north of 55%, I think 58% growth in the residence earthquake business. But I think by the middle of the quarter Ridgecrest was less of a driver, and I think the bigger driver, I think this is a net positive for us is the continued dislocation in the California homeowners market driven by wildfires.

And you have admitted markets trying to non-renew business on a consistent fashion, and I think you are talking about, you know as much as 10% of their book is being not renewed. So, that comes back into the primary market and kind of a jump on up for grabs dynamics, and so we get to compete on that. And so, I think that is a kind of a longer term catalysts for growth in residential quake.

Ridgecrest, I don't know anticipated, but because what you do have a circumstance we add new agents and we did add new agents over the course of the fourth quarter. When you have an - agent awareness is driven by awareness in the event itself.

On the commercial side, I think Ridgecrest is less of a driver of it. I think frankly for us, what was the bigger driver is us getting access to new distribution sources and that being a function of a larger financial size category, in this case A.M. Best - and hopefully what will come route.

When we get to A.M. Best Financial Size nine and I think just one thing to point out, if you look at the first part, and this is anecdotal, but our small commercial earthquake business, if you look at the first eight months of the year, our average monthly submission activity was just approximately 860 submissions a month.

After August, so September through the end of the year, that submission activity nearly doubled. It is closer to 1600 submissions a month. And so, I think that is a bigger driver of growth for us on the commercial side than the Ridgecrest earthquake. It just increased submission for us.

[Mark Hughes, SunTrust Robinson Humphrey]

Thank you.

[Operator]

Our next question is from David Motemaden, Evercore ISI. Please proceed with your question. Our next question is from Paul Newsome, Sandler O'Neill. Please proceed with your question.

[Paul Newsome, Sandler O'Neill]

I was hoping if you could give us a little bit more detail, about the basic assumptions, not the details, but the basic assumptions underlying guides for the year in terms of, just in general. And then separately, does that net guidance include some assumption for realized gains and losses?

[Mac Armstrong, Chief Executive Officer]

Hey Paul. This is Mac. Let me answer your second question first. It does not assume any realized gains or losses on the investments. And I think overarchingly, we feel good about the guidance that we are providing. We are very comfortable with the range, and I think the key point to emphasize is the numbers that we put forth is based on existing products and existing geographic footprint.

There are no major leaps of faith. There is no assumptions on new products that aren't already in the market, no new teams that are joining us, no major partnerships that we have not already consummated. So furthermore, no acceleration and pricing beyond levels where we are today, and therefore no leaps of faith on premium retention.

So, we feel that, we have a very good sense of what it requires from our existing products to accomplish the things that we provided. And I think what you also see is that from a loss perspective, we feel good about the loss assumption there. And it is consistent with what we have done in the past where you have many cash and attritional loss contributing to it.

So that kind of the overarching, top approach that we have taken to or bottoms up approach rather we have taken into the model. I think the one thing that I would add is that, we kind of view this guidance as an interim marker it is no way, an ultimate goal. It is a near-term goal.

And furthermore, while we have been somewhat conservative in the assumptions, it does not mean that we are not actively in new product development, we are not actively expanding our distribution front. We are not trying to go deeper in existing geographies, nor are we not trying to drive new partnerships and expand our footprint in that regard. So that really the overarching premise behind the guidance.

[Paul Newsome, Sandler O'Neill]

Well that makes sense. My second question is if you could talk a little bit about capital adequacy levels, obviously, you recently raised a little bit of capital, but you are also growing quite fast. Do you have any sense of like, when assuming maybe the continued growth that we are seeing a of late, how would the capital adequacy change overtime?

[Mac Armstrong, Chief Executive Officer]

So we ended the year, around 0.66 times ratio from a premium to surplus perspective. That was prior to the incremental call it $35 million in net capital that was brought on the balance sheet in January, that will push us probably closer to below point five times.

So, we think that for the indefinite future, we are adequately capitalized, the combination of free cash flow plus in concert with organic growth will allow us to kind of stay ahead of a ratio of 0.9 to 0.95 times, which is a number that we kind of think that we can get to on a steady state basis and anything beyond that, that is when we probably look at incremental capital. But as long as we are below that point 0.95 - 0.9 times ratio, we think we are good.

[Paul Newsome, Sandler O'Neill]

Thank you. Congrats on the year.

[Mac Armstrong, Chief Executive Officer]

Thank Paul.

[Operator]

Our next question is from David Motemaden, Evercore ISI. Please proceed with your question.

[David Motemaden, Evercore ISI]

Thanks good morning. Just a quick follow-up on the outlook for 2020. Are you guys assuming any catastrophe losses in there like a full retention loss or what is the assumption around cats in there?

[Mac Armstrong, Chief Executive Officer]

Hey Dave. We are assuming kind of mini cats, so think about as a similar type of loss profile to what you saw in 2019. There is not an assumption around a full retention loss. But if you look at 2019, we had losses from Tropical Storm Barry, Tropical Storm Imelda, Hurricane, Dorian so there are cats that influence it and it is the many cat component to what we have seen historically. But no full retention loss.

[David Motemaden, Evercore ISI]

Got it. Thanks. And just Mac just a follow-up on getting upgraded to A.M. Best Financial Size nine, any sort of sense in terms of timing around that? And any other sort of initial thoughts or attraction that you guys have seen from some of the larger brokers on the possibility of getting upgraded?

[Mac Armstrong, Chief Executive Officer]

Yes Dave, so the timing, the way that would work is once we file our Q1 statutory in group financial statements in the queue, then we would automatically trigger it, because it is really just a mechanical process that they do once they import your financials into their system and then the financial side categories triggered.

So you are talking about middle of the second quarter and then over the course of the second half of that quarter in third quarter is when it will probably really manifest itself into market. And going back to what I was talking about earlier on the call, you know, we got the Financial Size category eight on the heels of the IPO and our first quarter results.

And it really didn't start to bear fruit, you know, increased submission activity and the promulgation of a broader broker network until August, September timeframe. So the later half of the third quarter. Conservatively, I think the benefits of the Financial Size category nine would probably start to really, again, come to play in a similar timeframe. So third quarter, second half of the year.

[David Motemaden, Evercore ISI]

Got it. And do you, do you anticipate a similar type magnitude where I think you had said you got a doubling in submissions when you got upgraded to A.M. Best a size eight?

[Mac Armstrong, Chief Executive Officer]

I don't think it will be as pronounced as it was A.M. Best Financial Size category eight. I do think though it will help us in certain segments of commercial earthquake and commercial all risks in particularly kind of layered and shared accounts, which candidly is an area where there is probably much dislocation as anywhere in the property market at least. So that should be helpful there, but I don't think it is going to be again as pronounced as it was in the circumstance of Best Financial Size category eight.

[David Motemaden, Evercore ISI]

Okay. Got it. And if I could just sneak one more in just on the Japanese typhoons losses, just sort a taking 2019 and what happened with the losses and shred, does that change your approach at all to expanding into new lines going forward. And do you see making any changes to the assumed reinsurance book as a result of the experience?

[Christopher Uchida, Chief Financial Officer]

So the assumed reinsurance strategy that we put in place is really - we hired John Newsome did come to be our Chief Risk Officer. In addition to overseeing our analytics department, you know, he is looking to build out and assumed reinsurance product. And ultimately what we are really trying to accomplish there is get access to a certain geographies that have perils that we know well.

So illustratively Northeast wind where we are not licensed and actively writing business or Canadian earthquake. That was what we were trying to do with the assumed reinsurance. So we have assembled a book that has exposure to those perils plus some others, but all business that we understand.

Secondarily we use it as a way to really kind of get a sense of the market on a global basis and a national basis to figure out where there are segments for us to potentially go into. So it is kind of a good tool for front end R&D. So I think what I would say is I don't think the strategy is one that we are going to take our foot off the pedal on.

I think those same principles apply, that gives us access to products that we can't, or geographies where we can't access on a primary basis. It gives us a tool to do R&D, but at the same time we hope that we can recoup some of the losses that we have incurred from that over the course of 2020. So I think the thesis remains solid and it is one that we are going to continue to - impart and hopefully get paid for the loss that we have incurred in particularly from the Japanese storms.

[David Motemaden, Evercore ISI]

Okay great. Thank you.

[Operator]

Our next question is from Jeff Schmitt, William Blair. Please proceed with your question.

[Jeff Schmitt, William Blair]

Hi good morning. Question on the attritional loss ratio, I think you had said it was around 2.5% excluding catastrophe events there. How should we think about that going forward? As the business mix changes, obviously this product didn’t go up. But could we get a sense of how you are looking at it from a degree perspective?

[Christopher Uchida, Chief Financial Officer]

Yes. Hey Jeff, that is correct. We said 2.5% backing out some of the assumed or some of the storm activity that we called mini cats, we are not going to kind of carve those out specifically. We have kind of done in the past, but we are only going to carve out full retention events that under books that we view this everything kind of on the attrition or mini cat, but we just want to make sure that people get to see exactly what the - the more recurring or what we expect to be a little bit more recurring from a loss ratio standpoint. So that is why we disclosed that number.

Like you said, as we grow into other lines of business, whether it be our all risks are Inland Marine, we would expect a loss ratio to just tick up naturally overtime. We think it is - those lines of business do have attritional losses associated with them.

They are going to have losses with them, we do use different types of quota shares to help minimize the impact that any of those losses can have on our book, but also help generate fee income. That fee income will help to drive down our acquisition expense overtime as well.

So we use a couple different strategies that help those books, but they do with the growth and with those becoming a larger component of our book I would expect the loss ratio to tick up slightly overtime. It is not going to jump call it five point to seven and half, but a point, half a point over a quarter wouldn't surprise me.

[Jeff Schmitt, William Blair]

Okay. And then looking at that NPW to GPW retention, It was a bit higher and expect close to 60%. Did you say that was kind of driven by that new assumed reinsurance business? And how should we think about that for 2020?

[Christopher Uchida, Chief Financial Officer]

Yes, so I would say for the fourth quarter, if I'm looking at that ratio that is going to be driven by a lot of the growth that we are seeing. Like I said before, we buy excess of loss reinsurance in pieces whether it be June one or January one.

So when you look at the excess of loss component of that, it is going to look a little bit more like a stair step. Where you buy a piece of it and then it is kind of set for five or six months or three months depending on how much growth we are seeing.

But when you look at the growth that we saw that growth - so we bought excess of loss in June's then the growth on top of it, you are going to see a higher ratio that makes the seeded written look a little bit lower.

That is why I think it is more important from our standpoint to focus on the gross earned and the ceded earned, which is truly a more equivalent ratio of the risk that we are on and the excess of loss being amortized over the term of that excess of loss reinsurance.

So like I said for the year it was right around 50%. I would expect that ratio to remain true in 2020 as well, assuming that there is no major shifts in any of our lines of business or how we are doing quota share, reinsurance.

The quota share reinsurance kind of jumping around a little bit is a lot more linear for the written and for the earning of it when you see it on our books. But, as our mix stays the same, I would expect that 50% to be a better target, when you look at the gross to ceded earned going forward.

[Jeff Schmitt, William Blair]

Right, right. Okay. Thank you.

[Operator]

[Operator Instructions]. Our next question is from Meyer Shields, KBW. Please proceed with your question.

[Meyer Shields, KBW]

Great. Thanks. Good morning. One of the themes that we heard from a number of reinsurers with regard to January 1 is the [indiscernible] commission rates were going down. Are you seeing any of that in the quota share contracts that you are purchasing?

[Mac Armstrong, Chief Executive Officer]

Hey, Mayer. It is Mac. That is a good question. Fortunately, we have not, we have been able to maintain the economics on the quota shares that we put into place in the fourth quarter, and we didn't have much in the way of one more coming up. But, what we did renew on the [indiscernible] side was consistent with what we had expiring.

[Meyer Shields, KBW]

Okay, fantastic. And then if I look a little more on Japan, because I think I understand that a little bit less. Are you writing that on a quota share or excess of loss basis yourself and can you tell us what the reinsurance protections are for that particular business?

[Mac Armstrong, Chief Executive Officer]

Sure. So, we are riding that on an excess of loss basis, and the way we have done that is we have selectively partnered with existing reinsurers that we know well that that are big participants on our program. And so, there is an inherent trust that we have with those reinsurers and there is an inherit familiarity that that brings us a higher level of confidence.

So, what we are doing though is we are just taking a percentage of their excess of loss program, if you would. So, we are attaching high up in depending on the reinsurance, but generally speaking, we are attaching pretty high up the PML, and as a result the losses are fairly moderate. So, there is no first dollar exposure.

And I think it is worth pointing out that the losses that we have had as Chris can chime in, it is an estimate right now. There have been no claims tendered. So, we are just working in concert with our partners there.

[Meyer Shields, KBW]

Okay, fantastic. And then final question. I know the Insurance Commissioner in California is trying to sort of discourage non-renewals. Is that impacting submission flow for California residents earthquake?

[Mac Armstrong, Chief Executive Officer]

Yes, Meyer. That is a good question. I think the Commissioner certainly is trying to discourage non-renewals and has put a moratorium in place in selected areas, and I think that constituted roughly 800,000 homes in the State. So, it was a small component of it and frankly that area that are probably most exposed to wildfire.

You are still seeing 10% of - the average book of business, 10% of it be non-renewed, and I think that is a dynamic that when you put into context the total size of the book that insurer has, they can, even if they are more of 24 select segments, they can find another area to non-renew, that probably doesn't meet their underwriting criteria at this point. So, it is not impacting us. Long winded answer.

[Meyer Shields, KBW]

Okay. No. Perfect. No that is very helpful. Thank you so much.

[Mac Armstrong, Chief Executive Officer]

Thank you.

[Operator]

Our next question is from Matt Carletti, JMP. Please proceed with your question.

[Matthew Carletti, JMP Securities]

Hi. Thanks. Good morning. Chris actually want to follow-up on Jeff's question about kind of loss ratio progression, as the book evolves. Is there any kind of corresponding expense ratio movement that we should expect in terms of whether it is kind of commissions paid with the smaller lines of business to start growing? And separately, just an expense ratio question generally as you kind of get to scale and kind of the target mix of business you are targeting. What is a good one rate expense ratio that the Company can achieve?

[Christopher Uchida, Chief Financial Officer]

Yes, so on the acquisition expense for the lines of business that we are growing in, those will have - just naturally they have a lower acquisition expense than sort of our other lines of business. When you look at our residential earthquake business. It is driven by the MGA market, which has a higher acquisition expense.

These other lines that we are looking at, or that are growing right now all risk Inland marine are driven by the wholesale markets that just have a naturally lower acquisition expense than the MGA business.

As I mentioned, we also have quota shares for those lines of business. The ceding commission that we receive on the quota shares is netted against the commission expense. So that does help to drive down the acquisition expense a little bit more.

So as those eyes become a larger component of our overall book, I would expect the acquisition expense to also decrease. You know that is not going to drop similar loss ratio, I don't expect to jump up, I don't expect the acquisition expense to drop, we have five points in a quarter. But I wouldn't be surprised to see a decrease slightly over a period of time.

The other thing with that is it is also on an earn basis, so it is going to take a little bit longer for that just to develop naturally through the book, but I would expect those line to help push the acquisition expenses down.

Similarly, going to just the other operating expenses, or the expense ratio in general, we have not provided any type of guidance on the expense ratio. But as we look at our book, as we look at the way we have built things for growth, whether it be on the residential lines or just the systems that we put, we would expect there to be more scale in the book as we continue to grow.

I think the top-line that we are seeing should exceed any growth and expanses. That is not to say that we are not going to be prudent about adding people for technology and people for process improvement, but just naturally the growth in the revenue is going to exceed the growth in operations but we haven't provided specific guidance on. The expense ratio is going to drop to 55 or anything like that, we just think it is naturally going to go down overtime.

[Mac Armstrong, Chief Executive Officer]

Matt just to add a little more color. If you just look to Chris's point on the scale, the adjusted other operating expenses was 11.6 in the fourth quarter versus 12% in the same quarter, the year prior, and that is with a lot more investments in headcount, technology and frankly public company expenses, so I think that is illustrative of the scale that we are starting to achieve. So it is probably anecdotal support.

[Matthew Carletti, JMP Securities]

Right. And then if I get a sneak one more in Mac, just a high level question, you have got a lot of kind of great opportunities ahead of you in very different kind of stages of growth and incubation. As you kind of look out over the longer term, five years, whatever you want to define that as which business do you see is the biggest opportunity for Palomar or potential is that one that we haven't found out about yet you guys have kind of in the R&D and having public on?

[Mac Armstrong, Chief Executive Officer]

Yes, good question Matt. I think just overarching right now, I think we are seeing more opportunity in the commercial side of our business. And there is - within those lines that we have in commercial Inland Marine, commercial earthquakes and all risk.

They are different catalysts for each one. Commercial earthquake, not to beat a dead horse, but that was the prime beneficiary of our larger financial size category. And I think that is going to continue to be a driver of increased submission activity.

And then you couple that increased submission activity with a pretty attractive pricing environment that leads to selectively and growth and better margin. So I think we feel pretty good about the prospects there.

And the all risk side that is in a much larger market than the earthquake market is. So and while we are getting very good growth there, we still think we are pretty in the early stages of that operation, so I think there is a lot of promise there.

And then Inland Marine is brand spanking new, less than one year of operation and we have some real talent in that organization. The leader of that department has now gotten his filings into all 27 States in which we are licensed, he has increased his production count from the third to fourth quarter by over 140%.

So he has put a lot of infrastructure in place to really scale that organization. He is continuing to add talent. So I think that one it is really just the tip of the iceberg. So I think right now we are probably seeing more growth opportunity and promise in the commercial market, but we feel good about what we are doing also in the residential business and personalized business.

[Matthew Carletti, JMP Securities]

Alright, thanks Mac. Congrats on a first year as a public company, a strong one. And best of luck in 2020.

[Mac Armstrong, Chief Executive Officer]

Thank you Matt. I appreciate it. Thanks for your support.

[Operator]

Our next question is from Mark Hughes with SunTrust. Please proceed with your question.

[Mark Hughes, SunTrust Robinson Humphrey]

Yes, thank you. What was your comment on the pricing, residential versus commercial or different lines? But what did you have to say then could you give us an update on where you kind of see things standing today?

[Mac Armstrong, Chief Executive Officer]

Yes, so our residential business, you know we don't have the ability to take rate like we do in the commercial and most of our products have what we call an inflation guard, which allows us to kind of take rates a little bit ahead of the cost of construction and the like. So those typically have a 5% automatic renewal increase on them. And that is what we have in place right now for our personalized business.

On the commercial side, you know our composite rate increase was right around 9%, 9.2% for the risk side and then 13.4% for the commercial earthquake. So very strong. And I think we have touched upon it, you know, the rate increases accelerated from the third quarter versus the second quarter and certainly did from the fourth quarter versus the third quarter.

So I think we feel very good about domain, the ability to maintain rate through the course of 2020 and frankly that is as much informed by the continued pullback capacity from some of our competitors.

Lloyd's in particular, I think there are another five syndicates that were wound down in the fourth quarter. I think there is very strong rate integrity on our distribution network into our alignment there, and then larger riders continue to be mindful of their capacity in particular in larger property schedules.

So we feel very good about the pricing dynamic that we are seeing today and that we saw in the fourth quarter and don't see a near-term catalyst that pushes it the other way.

[Mark Hughes, SunTrust Robinson Humphrey]

How about the especially the homeowners you have still got the solid growth there, but being outstripped by other lines. How is the competitive environment or your appetite there?

[Mac Armstrong, Chief Executive Officer]

I think what I would say is more our appetite, you know, that is a nice line of business for us and we put it into discussing home owners quota share facility. So it is a good driver of fee income for us, but it is also in the circumstance of our Texas book it is probably our most matured line of business.

So we have kind of governed ourselves in terms of how much we are going to grow. We will grow that as we extend our geographic footprint. In the fourth quarter, we started to bring on more business in North Carolina to balance what we are doing in Texas, Mississippi and Alabama and there are other states that are on the horizon over the course of 2020.

But that line of business won't grow as quickly as any of the commercial lines. It won't grow as quickly flood and it is not grow as quick as residential quake.

[Mark Hughes, SunTrust Robinson Humphrey]

Thank you.

[Operator]

We have reached the end of the question-answer-session. And I will now turn the call back over to Mac Armstrong for closing remarks.

[Mac Armstrong, Chief Executive Officer]

Thank you, operator, and thank you all for your time this morning. This concludes Palomar's fourth quarter and full-year earnings call. We appreciate the time, the questions and always your support. We feel that 2019 was a milestone year for the company. We entered seven new lines of business, expanded our geographic footprint. We strengthened our team to the addition of several highly talented industry veterans, and we generated strong financial results.

Hopefully you will see that our 2019 accomplishments provide both motivation and invigoration for 2020. And hopefully that the earnings guidance that we provided you, you will feel very good about the prospects for 2020, certainly we do. So we look forward to speaking with you after the first quarter. And thank you very much for your time. Have a great day.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.